Money Q&A: I don't know if my PEP is worth having

When I acquired windfall shares from a building society a couple of years ago I took the opportunity of placing them in a single-company PEP. It seemed the obvious thing to do at the time. Recently, the PEP's management charges were increased, and I now wonder what I am paying for. Is there any real advantage in having a PEP? I am a basic-rate taxpayer.

WB, Yorkshire

The case for some PEPs, especially share-based PEPs, has always been debatable and is more so now. The same applies to the ISA tax shelter that replaced the PEP on 6 April.

Share-based PEPs invariably levy separate PEP charges. And if you have to pay charges in order to save tax, do you make a net tax saving after deducting charges? Many people make no net saving even on very low-charging single-company PEPs. Many undoubtedly pay more in charges than they will ever save in tax.

If you are a basic-rate taxpayer, compare the charges with the income tax saved. Since 6 April the value of the income tax saving has been halved from 20 per cent to 10 per cent of the gross share dividend. Having your shares in a PEP gives you an extra pounds 1 for every pounds 9 you would otherwise get.

Many share-based PEP fees are based on the capital value of your shares. If those shares have increased in line with recent rising stock markets, the PEP charge will have gone up (quite apart from any increase in the percentage management charge). But dividends have not gone up in the same proportion, so neither has the tax saving.

PEPs also save capital gains tax (CGT). But if you eventually sell the share outside a PEP, you'll be able to use your annual CGT allowance, currently pounds 7,100.

You may also be able to claim other reliefs - indexation allowance and taper relief.

Share-based PEPs and ISAs are most likely to benefit higher-rate taxpayers, especially if they also have substantial investments and would incur CGT bills without the PEP tax shelter. Before closing a PEP, find out what happens to your shares. They may simply be transferred to you. But the terms and conditions of the PEP might state that the shares will be sold and you will get cash. This may not suit you.

Time to sell?

A year ago I sought advice and invested the proceeds of a maturing Tessa in two different funds. A recent statement has both showing a loss, a poor result considering the performance of the stock market over the past year. Should I sell these investments as soon as they go back to the level at which I invested?

LG, Surrey

Why have your funds done badly? Ask your adviser why these funds were recommended. Did the adviser take account of all your circumstances, needs and the level of risk you were prepared to take? Were the risks explained to you? If not, you may have grounds for seeking compensation.

Three points to consider:

n Changing investments usually costs money because of buying and selling costs. The investor who buys and holds for the long term usually wins out, providing the investment is basically a sound one.

n Stock market investments rise and fall in value. Beware of selling out when a price is low, only to miss out on the bounce back.

n Some investments will go nowhere after a fall. You have to take a view on your investments' prospects. But don't shy away from selling at a loss, however hard psychologically it is to do so.